Goldman Sachs faced an unprecedented assault from one of its own after a banker published a withering resignation letter in the New York Times, calling the Wall Street titan a "toxic" place where managing directors referred to their own clients as "muppets.

Former Federal Reserve Chairman Paul Volcker, 84, whose “Volcker rule” would limit banks like New York-based Goldman Sachs from making bets with their own money, called Smith’s article “a radical, strong” piece. “I’m afraid it’s a business that leads to a lot of conflicts of interest,” Volcker said at a conference in Washington sponsored by the Atlantic.

Goldman Sachs slid $4.17 to $120.37 yesterday, leaving the shares still up 33 percent this year. The stock advanced 0.7 percent to $121.20 by 11:16 a.m. in Germany today.

David Wells, a spokesman for Goldman Sachs in New York, declined to comment beyond the contents of the memo and an earlier e-mailed statement in which the firm said it disagrees with the views expressed in the op-ed.

Fraud Lawsuit

Executives at Goldman Sachs haven’t changed their behavior even after the firm paid $550 million to settle a fraud lawsuit with the Securities and Exchange Commission and was accused by the U.S. Senate’s Permanent Subcommittee on Investigations of misleading clients, Smith wrote. The company published a report in January 2011 with 39 recommendations on how to improve its business practices and client focus.

“Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail,” Smith wrote. “It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you.”

The article was e-mailed across Wall Street. One employee at Bank of America Corp.’s Merrill Lynch division, a competitor to Goldman Sachs, said his team was told not to send copies to clients. Parodies such as “Why I am leaving the Empire, by Darth Vader” on thedailymash.co.uk and theborowitzreport.com’s “A Response from Goldman Sachs” also circulated.

‘Does Hurt’

“It does hurt them,” said Stephane Rambosson, managing partner at executive search firm Veni Partners in London and a former Citigroup Inc. banker. “The perception of the firm has gone down, and a lot of the winners of tomorrow are sitting back and thinking, ‘Do I want to be with Goldman?’”

There’s little evidence that the firm’s popularity with clients has been hurt by the SEC lawsuit, the Senate’s criticism or a recent ruling by Delaware Chancery Court Judge Leo Strine, who faulted Goldman Sachs’s handling of a conflict of interest. The bank won more business than any other in advising companies on takeovers and equity offerings last year, according to data compiled by Bloomberg.

Some clients of Goldman Sachs’s sales and trading department, the business in which Smith worked, said they are always cautious in dealings with Wall Street banks, understanding that their interests can diverge.

‘Prostitution in Vegas’

“The argument that Goldman has become increasingly profit- driven, sometimes at the expense of clients’ best interests, and that some employees use vulgar and disrespectful language, is hardly news,” Whitney Tilson, founder of hedge fund T2 Partners LLC, wrote in an e-mailed commentary. “What’s the next ‘shocking’ headline: ‘Prostitution in Vegas!?’”

Smith was an executive director in London, a title equal to vice president in New York. The firm employs almost 12,000 vice presidents, and most said in a recent internal survey that “the firm provides exceptional service” to clients, Blankfein and Cohn said in the memo. Smith, who sold U.S. equity derivatives to clients in Europe, the Middle East and Africa, didn’t respond to calls seeking comment.

Seven former Goldman Sachs partners and managing directors, positions that are more senior than vice president, said in interviews that Smith shouldn’t be taken seriously because he was a junior employee and may have been disgruntled about his pay or career. All asked not to be identified because they didn’t want to risk ruining their relationship with the firm.

Still, six of the seven said they agreed with Smith’s criticism of how the firm has treated clients under Blankfein and Cohn’s management and that current members of the management committee would, too. Even so, they said they don’t expect the board of directors to take action or that anything will change because the firm has made money and outperformed most rivals.

‘On a Pedestal’

“He may have aired a few comments that are true, but he’s placed himself on a pedestal,” said Jason Kennedy, CEO of the Kennedy Group, a London-based recruitment firm. “The reason he’s been at Goldman Sachs for 12 years is that he liked the name and probably liked the money.”

It’s rare for people on Wall Street, especially at Goldman Sachs, to speak out publicly against their employers or former employees, said Roy Smith, a former Goldman Sachs partner who’s now a finance professor at New York University’s Stern School of Business.

“Who’s going to hire someone who would do that?” he said. “The industry will close ranks on such things as whistle- blowing in this context.”

Sales and Trading

NYU’s Smith, who’s not related to the author of the op-ed, said Wall Street’s culture has changed because trading has become a more important source of revenue than the fees banks get from advising companies on takeovers or financing. Goldman Sachs generated 60 percent of its 2011 revenue from sales and trading.

The relationship with clients in the trading department differs from the investment bank, Smith said. Firms often are on the opposite side of a client’s trade, and can profit at the client’s expense. Still, it’s not as simple as the article describes, he said.

“It just doesn’t happen that it’s easy to make money by ripping off your clients or counterparties because they’re pretty smart people for the most part,” he said.

Though some competitors relished the criticism of Goldman Sachs, which was the most profitable securities firm in Wall Street history before it converted to a bank in 2008, they may not be so different.

Smith’s opinion piece “seems to be symptomatic of many, if not most, of the banks around the world,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “It might be that Goldman, as one of the most successful ones, is also one of the most extreme.”

• With assistance from Ambereen Choudhury and Liam Vaughan in London and Cheyenne Hopkins and Jeff Kearns in Washington. Editors: Peter Eichenbaum, Dan Reichl

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